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Small Business Employee Benefits and HR Blog

Pre-Tax vs. After-Tax Medical Premiums

June 9, 2015

Many small business owners we talk to want to know more about the tax deductibility of medical premiums. Here is an overview on when medical premiums are pre-tax vs. after-tax (“post-tax”).Pre-Tax vs. After-Tax Medical Premiums

Pre-Tax Medical Premiums

There are certain types of medical premiums you can pay pre-tax. These generally include employer-sponsored health plans such as:

  • Major medical coverage purchased through your employer

  • Supplemental/voluntary coverage purchased through your employer

  • Healthcare spending account contributions, such as FSAs

Tip - If you do not want to participate in your employer’s pre-tax plan, you may elect to have your medical premiums deducted on an after-tax basis. For example, if you pay with after-tax money you may be allowed to drop your coverage or enroll in the plan at any time. If you pay with pre-tax money, you may have to wait until a specific time to enroll in the plan or to drop your coverage.

Related: Tax Exclusions vs. Tax Deductions vs. Tax Credits in Healthcare

After-Tax Medical Premiums

There are certain types of medical premiums you must pay for with after-tax (“post-tax”) dollars. These generally include plans you purchase for yourself such as:

  • Major medical coverage purchased on your own (ex: through the Health Insurance Marketplace)

  • Supplemental/voluntary coverage purchased on your own

Tax-Free Reimbursement of Medical Premiums

If you purchased coverage on an after-tax basis, you may be able to receive tax-free reimbursement for the premium if the business offers a tax-free reimbursement plan (ex: Health Reimbursement Account).

Using these types of plans, reimbursements are tax-deductible to the business and tax-free to the employee, although some tax benefits vary by type of business owner.

Tax Deductions for Medical Premiums

Lastly, if you paid for your medical premiums with after-tax money, you may be able to deduct your premiums as a medical expense on Schedule A when you file your tax return with the IRS.

Before you can get this tax benefit, your total medical premiums must be more than 10 percent of your adjusted gross income or 7.5 percent if you or your spouse is 65 or older.

If you paid your premiums with pretax money, or received tax-free reimbursement for your premiums, you do not qualify for this tax credit since you already received a tax break.

Additionally, most self-employed taxpayers can deduct health insurance premiums using the line 29 deduction on the 1040.

Conclusion

Many small business owners pay for their own medical insurance. While payment of medical insurance, in this case, is after-tax there are reimbursement plans and deductions available to receive similar tax treatment on individually-purchased medical insurance.

Do you have a question about the tax treatment of medical insurance? Leave a question below and we’ll help answer it. 

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